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October 12, 1999

VA Linux Systems Files for $70m IPO

By CBR Staff Writer

By Rachel Chalmers

VA Linux Systems Inc, a Sunnyvale, California-based provider of Linux hardware systems, has filed for a $70m initial public offering of shares. The proceeds are earmarked for working capital and general corporate purposes, including drastic expansion of VA’s sales and marketing activities. VA’s filing follows the spectacular stock market debut of Red Hat Inc, a distributor of Linux operating systems packages.

As ever, it’s the Risk Factors that make the juiciest reading, occupying 15% of the filing document. Most are the usual disclaimers: VA is a young company in a new and volatile industry; it has a history of losses; revenue growth may not continue; volatility in results is likely to contribute to volatile share prices, and so forth. More telling are the risk factors that are specific to VA.

It seems the company has always relied on a single source contract manufacturer, by name Synnex Information Technologies Inc. With the exception of a small internal systems integration and prototyping facility, we have relocated our internal manufacturing operating to Synnex’s manufacturing facility in Fremont, California, the filing explains. The risks of having done so include natural disaster – Fremont straddles the Hayward Fault – delays, disruptions, capacity constraints and quality control problems.

Add to that the fact that VA wants to expand to European markets next year, and the company could find it difficult to scale its manufacturing operations to meet demand. As if that weren’t enough, Synnex in turn depends on single and limited source suppliers for its key components. Any inaccuracy in predicting manufacturing requirements could be disastrous for either company – or for both.

The filing also makes the cogent point that VA will suffer if the GNU General Public License (GPL) and its derivatives turn out to be legally unenforceable. These licenses have yet to be tested in court. A related risk is that VA is vulnerable to claims that its products infringe third-party intellectual property rights. VA’s systems incorporate software developed by thousands of programmers. A successful claim by any one of those programmers could have implications for some or all of the others, multiplying the risk many time. The filing acknowledges that VA’s continued success depends on ongoing good relationships with Linux developers.

Imagine, too, if Linus Torvalds forbids VA to use the Linux trademark for some reason; its business could suffer enormously. Finally, the filing notes that VA’s management team is new and may not be able to work together at all. There’s also the risk that founders and other irreplaceable personnel – president and CEO Larry Augustin is mentioned by name – could leave. None of this should be taken to mean that VA’s IPO will fizzle. On the contrary, as the first time a Linux hardware vendor has gone public, and the first Linux IPO of any kind since Red Hat, VA’s stock market debut will be closely watched – if not actually traded up to the heavens.

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